Accounting Concepts And Conventions

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ACCOUNTING PRINCIPL

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Accounting principles are guidelines & standards, which have been accepted by the accounting profession in preparation and presentation of accounts of the business. It is approved and normally accepted by the government bodies & controlling authorities. Accounting principles are uniform in order to understand in the same sense by those using it. Also they are not rigid (i.e. inflexible) like principle of gravity but they are flexible. This is because mainly the account principles are social science. Accounting principles are not universal and permanent as they are not discovered but are developed by man from time to time. Thus the development of accounting principles is a continuous process. Accounting principles are evolved over the year by following_ 1. The Professional Institutions like the

“INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA” 2. The legislation of the country like_

“C OM PANY LA W B OARD (C LB) ” “C EN TRA L BO ARD OF DI RECT T AXES (CB DT)”

etc.

ACC OU NT IN G CON CE PT S AND CON VE NS IO NS .

Accounting concepts: - An accounting concepts is a basic assumption concerning the economic environment in which accounting exists. Characteristics of Accounting Concepts:1. Accounting concepts are continuously changing and evolving: In the event of rapidly changing economic activities, accounting concepts also undergo frequent changes. This is a healthy sign for the accounting fields. This is because of the following two main reasons. i. It is relatively a new field and hence it is developing with time. ii. Some aspects tend to change with the changes in social, economic and commercial conditions. 2. Another important feature of accounting concepts is the interrelationship among the different concepts. Most of the concepts do not stand by themselves; they depend on the other concepts to a large extent. Basic Accounting Concepts. 1. The Business Entity Concept:- Entity concept is an assumption that for an accounting purposes, the business is separate and different from that of its owners. The entity concept is also known as the concept of an “Enterprise” and is one of the central concepts in accounting.

The entity concept may be applied to the whole organization or even to the part of the organization. Thus according to these concepts the business is treated as separate unit from that of its owners, creditors, managers, employees and others.

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The entity concepts form the basic for recognition of the accounting concepts. 2. The Going Concern Concept:- According to this concepts an enterprises has an unlimited existence. Thus the concept of Going Concern Continuity can be exprssed as under. “Unless & until there is evidence to the contrary, an enterprise must be considered as continuing largely in its present form and with its present purpose” There are some undertakings (business) which are primarily for limited period. Such entities are exceptions. 3. The Money Measurement Concept: - The money measurement a concept is an assumption that any accounting transaction is to be measured in money or money’s worth. It is only when a transaction is measured that it can be recorded in the books of an enterprise and the result of the business is determined. Thus the measurement of a transaction also has to be in a common denomination (medium). Money is this common denominations in which transaction are recorded in the books of account. 4. The concept of Accounting Periodicity: - The determination of the income of the enterprise cannot be postponed till the end of the enterprise. Since, according to Going-concern concept there is no limit for the life of the enterprises. Hence the economic activities of the business must be recorded periodically. These period is called as Accounting period & these Accounting period is normally called as “Accounting Year” or “Financial Year” or “Fiscal Year”. It is, within this Accounting Year, that the income & expenses (i.e.) costs & revenues are matched with reasonable accuracy to provide significant results. 5. The Historical Cost Concept: - According to Historical cost concept, all the transactions are recorded in the books at

cost and not at its market value. Thus the underlying ideas of this concept are two forms. a. An asset is recorded at the price paid to acquire it i.e. at cost and b. This cost is the basis of all the subsequent treatment of the assets. e.g. depreciation, stock valuation, etc., 6. The Concept Of Matching Cost and Revenues: - Matching of Expired cost (i.e., expenses) and revenues for the period’s determination of income, is one of the most important concept and procedures of accounting. This concept follows the accounting period concept i.e. once an accounting period is determined, within that period, the revenues and its related costs are matched. This concepts is one of the most important concept of accounting and has received major attention of accountants. Matching of costs and revenue is the ‘Test reading’ of the results and the success of the business activity. At the same time, it is one of the most difficult accounting problems.

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7. The Accrual Concept The matching process as discussed above ultimately results in what is known as the Accrual concept. This concept is also called the Accrual theory of Accounting or Accrual Accounting It means a system of recording revenues and expenses of particular accounting period. Whether or not they are receive or paid in cash, at the time of accounting. It is also known as “Mercantile System of Accounting” as contrasted to “ Cash system of Accounting. In cash system of accounting, the revenues are recorded only when received, whether due or not. Payments i.e. expenses are also recorded irrespective of the fact whether they pertain to the period concerned or not. For matching of costs and revenue under accrual concept, all revenues related to current year, whenever received, and all costs of the current year, whenever paid, must be taken into account.

Account ing con vent ions.

Accounting convention is defined as “a rule or practice which has been sanctioned by general custom or usage.” It is the rule or statement of practice which adopted as an accepted method of procedure, either by general agreement or by common consent, which may be expressed or implied. Accounting convention is guide to the selection or application of a procedure. Following are some of the important accounting conventions. i. Conservatism. ii. Consistency. iii. Materiality. Now we see one by one in detail i. Conservatism. It is one of the oldest accounting conventions, resulting from the conservative outlook of the earlier accountants. This convention requires that the profit should not be taken into account unless it is actually realised in cash, while all possible losses must be fully provide for. This convention is most effectively employed in valuation of current assets, like stock, debtors, bills receivables, etc. As seen above, the principle of valuating stock at “ cost or market value which ever is lower’ is the result of this convention. The Provision for bad and doubtful debts is also made according to this convention. ii. Consistency. The convention of ‘Consistency’ indicates that a procedure selected from among several acceptable alternatives must be followed consistently during the successive accounting periods. It is one of the most important accounting conventions arising from established custom or usage. Therefore, changes in accounting methods if any, must be fully disclosed by way of explanatory notes to the financial statements, together with its effect on the results for the year as well as financial position.

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iii. Materiality: The accounting convention of ‘materiality’ means that the effect of all significant or material transactions must be

reported in conformity with the general accepted accounting principles. This convention puts a check on the unnecessary disclosure in the financial statements. The financial statements should not be bulky with unnecessary details which are not material. A separate disclosure would be necessary, if an item is material in nature. The Companies Act, 1956 also says that a separate disclosure of items of income and expenses should be made if it exceeds 1% of total revenue of the company.